PART TWO: TALENT

STRATEGY, CLAUDIO

FERNÁNDEZ-ARÁOZ

AND DANIEL GOLEMAN

Making People Decisions

Daniel Goleman: Claudio, I’m just thrilled that you’re here. You’re one of my favorite people, and I’m so pleased you’ll be discussing great people decisions.

Claudio Fernández-Aráoz: Thanks very much Dan. You know that you are also one of my favorite friends, and one of my most admired people.

Goleman: So, just for background: I know that with your firm, Egon Zehnder International, you have spent lots of time making people decisions, or helping make people decisions, for some of world’s largest organizations—and that this is the expertise on which your book and your talks on great people decisions is based. Could you tell us a little about that?

Fernández-Aráoz: Yes. There are, basically, the “why” and the “how” I became passionate about this. You probably want to hear a little bit about both.

The reason why I’m so passionate about great people decisions—by which I mean great appointments, whether promoting someone from within or hiring someone from outside—is because I am from Argentina. That’s my native country. One hundred years ago, Argentina was one of the 10 richest nations on Earth, a country with great future. And still, today, we say Argentina is a country of the future, and will unfortunately always be. It’s a big frustration. It’s had a decline of a century, and I think it’s because of poor leadership at the top, in the public and the private sector. So that’s one of the reasons.

As far as how I became so passionate, it’s because, as you said, for the last 25 years I’ve been working as an executive search consultant at Egon Zehnder International, and I’ve realized the huge impact of making great people decisions, and at the same time the immense difficulty we have making them. That’s why I’ve spent lots of time not just making people decisions but conducting research, and now spreading the word—trying to help everyone make greater people decisions, whether promoting from within, hiring from outside, with or without external professional help.

Goleman: You’ve said that actually many companies make rather haphazard people decisions. What do you mean by that?

Fernández-Aráoz: Yes. Some three or four years ago we did a major study together with Nitin Nohria, who now happens to be the dean of Harvard Business School, and our firm. We interviewed 50 CEOs of some of the world’s largest global companies and their HR leaders. We asked them questions about development, questions about retention, questions about motivation, and questions about appointments—about people decisions. We found that most organizations have a clear code of best practice when it comes to development. However, most companies are clueless regarding the best practices on making senior appointments. If you were to ask them, for example, “What’s the best practice? To promote from within? To hire from outside?” Different people would have completely different answers. Some would say, you know, “The best is always to have great internal candidates, and I would feel really frustrated if I don’t have two or three great candidates, and I think it’s my moral obligation to have them.” Others would say, “I would try to bring fresh blood, because it’s very hard to promote change when someone is carrying all the baggage from inside.” A third person would say, “The only thing that has worked for me is bringing former colleagues I have worked with in the past at some other companies.”

But when you were to ask them why they make these decisions, or why these are best practices, they would say, “Well, because it works best,” and when you ask them why, there was nothing there. So the first reason why these decisions are not made well is because people lack a code of best practice. That’s the first reason. The second reason why this happens is because we have this old brain for a new job. You know how it is, Dan. You are an expert in this. You know that the human animal is two million years old, and that our brain is a piece of hardware that didn’t have any major upgrades for the last 10,000 years. And you know, the decisions of the primitive man when someone was approaching had to be instant and unconscious, and they were based on whether the person was similar to you, whether the person was familiar to you, whether you felt comfortable. That was the way in which you decided to welcome a member of the tribe, or to fight or flight.

Now, today, when you want to build great teams, what you want is exactly the opposite to that set of criteria. You want to have the value of complementary skills, which imply diversity—which is the opposite of similarity or familiarity. I want people to confront each other in the right way. So we have the wrong brain, and on top of this, on top of the wrong hardware for hiring, we have the wrong software, because we don’t study this. That’s why unfortunately people decisions today are very primitive, and there’s a huge opportunity cost of these decisions for society.

Goleman: What are those costs? What, for example, is the cost of having the wrong person on a job?

Fernández-Aráoz: The interesting thing—and most people are not familiar with this—is that despite the fact that we are very similarly gifted when it comes to basic skills such as walking, when you get into more complex jobs, the difference between an average worker and a star worker is huge and grows exponentially with complexity of the job. For example, if you go to a traditional line worker, or worker on an assembly line, and you look at the productivity, you would have a distribution. If the average productivity is 100 pieces per minute, you would have a standard deviation of about 20%. Which means that a star worker in a traditional assembly line would be 40% more productive than the below-average worker. That’s an opportunity cost in a simple job—if you are able to hire or develop the most productive workers, you will be 40% more productive.

Now, the interesting thing in the knowledge-work world is that the more complex the job, the larger the spread in performance. So, for example, an insurance salesman: Standard deviation is not 20%, it’s 120%! So a star insurance salesman would be 240% more productive. If you go to a more complex job, computer programmer, or an account manager of a consulting firm, then a star worker would be 1200% more productive. That’s the opportunity cost of not getting the right people at the top, so there is a moral obligation to make sure that you have the most productive workers, particularly at the top, because of the size of the impact that they have.

THE SEVEN POINTS OF GREAT PEOPLE DECISIONS

Goleman: Claudio, given that there’s a fantastic opportunity to benefit any organization by getting the right person at the top position, or near the top, how do you do it right? What are you basic recommendations?

Fernández-Aráoz: I’ll first give you the recommendations at the individual level; because while making great people decisions is brutally hard, the good news is that this is not an art—this is not the result of intuition, this is not the result of a gut feeling—this is a craft and a discipline that can be learned, and should be learned, for career success, because of the value of organizations and for making the world a better place. Then I will mention a couple of organizational conditions for making this happen.

On the individual side, the first step is deciding when a people change is needed. Now, we tend to make a people change when someone is displaying poor performance. And it seems obvious, but that’s not the right answer. First, it’s not the right answer because there’s lots of research that shows that people procrastinate. There’s research by McKinsey and others that show that 90% of executives consider their organizations lousy at removing poor performers. 90%! Can you imagine a soccer team where you don’t remove 90% of the poor players? So when should you make a people change? Not by looking at the past performance, but by looking at the future. Because someone can have an outstanding performance today, at the low level, in a simple job. You promote that person, in the future, in a much more complex job at a much higher level and the person can fail miserably. So it’s first looking at the future. Second question: what to look for in a candidate. Now, this is a very general question, and it is very hard to generalize. If there is one generalization you can make about it—and this is not because I’m speaking with Dan Goleman; this is based also on my own research—it’s to watch for the soft. We tend to promote people or to hire people based on how clever they are, not measuring IQ but looking at the ground, by looking at their hard experience, and all of that counts. But all the research that I’ve done in Latin America, in Germany, in Japan, in different parts of the world shows that while you need relevant experience for a senior position, while you need clever people for a senior position, the factor that has those executives make it or break it—it’s basically emotional-intelligence-based competencies.

When I initially did the analysis of the first 250 people I had personally hired in Latin America, I classified them as successes and failures. When I looked at correlation between those decisions where I was just looking at the hard factors, IQ and experience, I would fail 25 percent of the time. One out of four searches. In those cases, where I’ve also checked for the soft—for emotional-intelligence-based competencies—I would only fail three to four percent of the time. So that’s the second step, knowing what to look for in a candidate. Make sure to watch for the soft, because the soft has become hard—and for senior executive level positions emotional-intelligence-based competencies are the key for success.

The third step is where you look for candidates. Remember what I said before about people having their own preferences based on company traditions or just personal preferences? Well, research basically shows that—on average—if you want to promote big change you bring in an outsider. Otherwise you promote from within—that’s what the average research shows. The interesting thing is that the average is meaningless because there is a huge spread. There are outstanding cases of internal promotions and dramatic cases of internal promotions, and in fact, some internal promotions are even worse than the average external hirings. So what you should do is first look both inside the organization and outside, consider a wide pool of candidates, check for the relevant competencies for the job, and promote or appoint the best person. That’s the best practice—looking inside and out. Another question is how to assess people, which is a key question. Of course, as I said, our brain is basically programmed to make unconscious snap judgments, which are very long on snap but very short on judgment—and they are based on the similarity, familiarity, comfort, and so on. So you should avoid that temptation.

Next, make sure you take two important steps for great assessment. The first is to use a proven competency model to identify the relevant competencies for each job and at which level you need the candidates to demonstrate competence. Then you check that with a combination of well-structured interviews and reference checks. Those are the best tools and techniques.

The second important recommendation for assessment is not just using the right tools, but also using the right people. If you trained a monkey to use competence-based assessment with behavioral-based questions, probing interviews, and reference checking, it will still be monkey’s work. Research shows, for example, that using the same technique, the best interviewers have a great accuracy and the worst interviewers were worse than flipping a coin. They have a negative correlation between assessment and performance. So the second recommendation for assessment is just involving the right people. The right people are people who are familiar with the job. The right people are people who have been trained in assessment techniques, and the right people are people who have the right motivation for a valid assessment.

THE PUBLIC SECTOR

Goleman: Claudio, on the basis of your expertise and your research, you have some very sound recommendations for how companies can select the best people and how important that is, why it really matters. It seems to me the sector that’s most behind in this is the political sector and the public sector. What could we do there that we’re not doing?

Fernández-Aráoz: You’re absolutely right, Dan. You know, when I was writing the book, in the final chapter, I sent an email to my colleagues worldwide, working in 63 offices in 38 different countries, about the worst examples and best examples of people decisions they’ve made. I was thinking about the corporate world, and yet half of the examples were about the elections of country presidents, prime ministers, and so on and so forth. I remember once, the very same day in which the last U.S. presidential election was happening in the U.S., we were having a great people decisions event together with Jim Collins in London. Due to the time difference, while we were speaking about people decisions, Jim had sent his postal vote. The most important people decision in the world, selecting the president of the most powerful nation on earth, was being made and I was saying, “Listen, even in the U.S.—such an admired nation, such a powerful country—if you look at the basics of people decisions, you at least need three conditions: a wide pool of candidates, a sound assessment, and proper motivation.”

Now, as you know, I have great respect for Hilary Clinton, because she was this close to being the Democratic candidate for the last presidential election, and she would probably have been elected and re-elected, and then you would have had a father, a son, a husband, and a wife serve for over 20 years as president of the United States. Out of 300 million potential candidates! Are we doing a good job at generating candidates even in the most powerful nation?

Second, if you look at the assessment, few people think about what the future will look like, what competences we will need, and have an open discussion about that.

It’s basically based on the image that you get in a presidential debate on television, and if you look at motivation, in most countries in the world, people in the public sector make a fraction of the money they would make in the private sector. How can we say we want to attract the best and we don’t pay them? So I think that there is a long way to go, and I think that most countries really have a long way to go, and there’s lots of research that shows that people who are political experts, when they are making political decisions they work in the default status of their brain. They think less than when they are thinking about other things. So what’s the way to do it, and are there good examples? There are some good examples.

One good example is Singapore. Now, Singapore is a country in Asia that became independent in 1965. It was a former British colony. Jamaica was also a former British colony that became independent at about the same time, that was about the same size with the same population. Singapore was a poor nation, like Jamaica. The founding fathers of Singapore basically confirmed that the only way out of a tiny nation with no natural resources and no economies of scale was talent. And they got the brightest people, they sent them abroad with fellowships to study at Oxford, at Cambridge, at Stanford, at Harvard. They made sure to bring people of high integrity into the public sector and they built what is, I believe, today the most competitive nation on Earth. It’s been decades of working with this idea.

They also imported the best practices. Initially they borrowed them from Shell. They started assessing not just competence but potential 30 years ago, and it’s decades of bringing in people with the right ethics, with a high level of competence, and they have built what is arguably the most competitive nation.

So it can be done, but I think that very significant steps have to be taken. First, make people aware about the huge cost of a bad government, and the huge value of great governments and great officials. Second, to educate people about making great people decisions; for example, the pubic sector, in many cases, tends to favor hard experience and educational background because they’re easier to measure. But as we said before, it is the soft factors that make a difference—so governments should do a much better job at assessing behavior and those emotional-intelligence-based competences. Finally, I think that they should have the courage to make sure that they pay the right people well. In the case of Singapore, they initially had to build credibility for a couple of decades. People in the public sector were not making lots of money because if they had the reputation of being incompetent and corrupt people, of course, you would not be throwing money at them. But once people realized that they had great people with this mentality of excellence, service, and integrity, then the whole population supported paying them extremely well.

So you could attract the best people in the public sector, so I think there is a way out, and I agree with you that this is a major priority.

RIGHT ETHICS

Goleman: Claudio, we’ve just been through a world economic crisis brought on by some extent because of a lapse in ethics, many people argue. When you look to selecting the people who are more likely to become the leaders in the future—for example, people who go to a business school—what would you recommend that the admissions department do in order to get the best quality pool of candidates?

Fernández-Aráoz: Yes, Dan, I think it’s an excellent question, and I’ve debated this, and I know my position is rather controversial for some people. I know that there was a big debate, particularly at Harvard, a couple of years ago about how to fix business schools—particularly regarding ethics. There were many recommendations about codes and teaching ethics and so on and so forth, and I think that all of those recommendations are fine, but I think that the impact of those recommendations is marginal compared with the impact of two actions that I think business schools should make. The first one is in admissions and the second one is the appointment of the professors.

In admissions, I really believe that people come to business schools, to a great extent, with their values already set. It’s very rare to have someone change their values fundamentally after that age. And I really think that a criteria for admission of those future leaders should be their values. I think that when business schools are admitting candidates—particularly the top elite business schools, where they admit just a fraction of applicants—they are just not only teaching them, training them, they are giving those individuals amazing opportunities. Because if you have a Harvard MBA, if you have a Stanford MBA, you have many more opportunities. You have many more chances of making it to the top jobs, and to have much larger economic, social, and eventually even political responsibilities. So I think that that should be a criterion, and that can be measured. I’ve particularly helped one of the top Ivy League business schools improve and strengthen their business process by looking into the values of the students. That can be done through well-structured interviews and reference checking of those candidates. And I think it makes sense if you want to promote ethnical leadership, and if you want to make sure that those who graduate have the largest chances of being competent ethical leaders. If you really believe in that, you should take that into account in the admissions process.

The second thing that I believe business schools should do is whenever they appoint their professors, particularly the tenured professors, they should be leading examples of integrity. Because a professor is a leader; and a leader, as we know, is not a leader because of what he or she says, even because of what he or she does—it’s because of what he or she is. I think that great leaders and great professors can set our hearts on fire, and really illuminate and really inspire us to lasting greatness long after we are gone. Not only to be successful, but basically to have a career which is not based on individual selfishness, but on the real purpose and significance of what we do. For that, there’s nothing like professors who really live these values and who are leading examples of integrity if you want to produce ethical leaders.

Goleman: Who are some of the leaders in business that you admire the most?

Fernández-Aráoz: I’ve seen many great leaders, many great CEOs. One of them that I admired the most, because I’ve discussed with him many of these ideas, is Jack Welch. Most people would consider him the manager of the century. And while Jack Welch has the image of a very tough person, particularly at the beginning of his career, he’s an individual who created many more jobs than the ones that he destroyed, and he saved General Electric. General Electric was founded by Edison at about the same time as Westinghouse founded Westinghouse. Jack Welch realized that if GE did not go through a massive transformation, it would basically mean its disappearance. Where is Westinghouse today? Now look at GE today: a very solid company.

Welch really believes in talent passionately. I noted earlier that most companies today have a development process in which the best practices they claim are basically the same—well, that’s the GE model. Every year you will assess people. You will assess them on performance, on competence, on values, on potential, and then assign the stars to the most challenging jobs to get the most out of them and to develop them. That’s the GE model. That’s why I have a huge admiration for Jack Welch—not only because of what he did, but because he placed talent at the center of it.

In his 30 years as manager and his 20 years leading the largest creation of value in the world’s corporate history, he really lived this. He would spend more than half of his time assessing talent, appointing the right talent, and developing the right talent. And he would have the courage to do so. He once said to me, “Claudio, making people decisions is very hard; making great people decisions is brutally hard.” And he would say that the first time he became a manager at GE he would get it wrong half the time, and that 30 years down the road—of which the last 20 were at the helm of GE, leading the largest creation of value in the world’s corporate history—he would say he would still get it wrong 20 percent of the time. I think that he hasn’t gotten it wrong 20 percent of the time, but still, he would have the courage to undo the wrong people decisions.

Another person I admire a lot is Jeff Bezos. I think that Jeff Bezos has also created an amazing company. If you look at Barnes and Noble, this iconic bookstore retailer, it’s worth less than one billion dollars today. Amazon.com I haven’t checked lately, but it’s worth probably 60 billion dollars. I admire Jeff Bezos because of two reasons: One is because, again, he places talent at the center. Few people know about this. He was interviewed a couple of years ago by Harvard Business Review, and someone asked him the secret to his success, and he responded in a very humble way. He said, and I’ll paraphrase, “I think that the secret for success in life is to sequentially ask and properly respond to three types of questions. Once you become a manager, the first type of question is all about how. How do I do my job? How do I plan? How do I control? How do I delegate? How do I get organized? Then as I advanced in my career, the money was no longer in being marginally 10 percent better at planning. The money was not in the how. It was in the what. What business to be in.” Then he had the genius of inventing electronic retail for the book market. So he had the genius, but then started one business after the other. Today Amazon is an amazing company, which is now in all sorts of retailing—not just book retailing, but it’s also in cloud computing and so on and so forth. But then Jeff Bezos concluded, and I’m paraphrasing again, “Now that I’m at the helm of such a large and complex company such as Amazon.com, with the infinite combinations of consumer preferences and technology possibilities, I am no longer smart enough to identify the what. So all my questions today are not about how, because I don’t do the job. They are not about what, because I am not smart enough to identify the most attractive whats. They are all about who. Who will be the people on my team helping me identify the whats and implementing the how?”

That’s one reason I admire him a lot. The second reason is the amazing level of discipline that you have now in that top company—an amazing company.

THE COMMITTEE SEARCH

Goleman: Claudio, from your perspective, what are the hidden dangers in a company forming a committee to go out and look for someone? The very nature of a bias is that it’s a skew in our perception that we don’t know that we have; so what are the most frequent biases that you see, and what can people do to overcome them?

Fernández-Aráoz: Well, first, at the individual level, as I said before, you know we have this old brain. So, I talked about procrastination. Never changing a person until it’s basically too late. A very frequently occurring bias is a snap judgment, an unconscious decision that you make. And this has been tested, for example, when interviewers have been stopped after a couple of minutes. They’ve been asked, OK, rate this candidate: Would you hire him, yes or no? Then they would let them proceed with the interview for as long as they needed—half an hour, one hour, two hours—then they would ask them to rate the candidate. “Would you hire her, yes or no?” They would compare the initial decision and rating to find out they’re almost identical! So why would you spend one hour, two hours in an interview if you basically get the same outcome as after two minutes, which for the typical interview results in a lousy decision?

Snap judgments are basically based on whether someone is articulate, whether someone communicates well, and totally irrelevant factors such as similarity, similar social background, similar education background, and the way someone dresses and so on and so forth. Which are biases. Now, the problem with that is that those are totally unrelated to performance. And the second problem is that it works against minorities, and I think that this is creating a major problem—particularly in those places in the world where the largest pool for talent is happening; for example, in the American countries.

In Asia—particularly in China and in India—as a result of biases, for example, women would be underrated. Why? Because there aren’t many women leaders, and therefore you assume that someone who is a woman is not a great leader, and it’s a circle that you can never break. You’re probably familiar with a study about the philharmonic orchestras. The way you selected the players in a philharmonic orchestra is by having an audition where you would have the judges and the players in front of them. They would play the instruments, and they would rate them, and they would select the best. Now, for some reason, for large wind instruments, very few women were being selected and someone said, “Well, maybe we are falling into some bias. We think that they have smaller fingers, smaller lungs, whatever. Why don’t we put a screen between the player and the judges?” They did that, and the percentage of women grew very significantly. But then they could still listen to the tapping of the heels, so they put a carpet and a screen and then the percentage of women selected really shot up.

Even though some of the judges were women, they were unconsciously underrating them because they thought unconsciously that they would not be as good players. The secret to avoid these biases, and to avoid any type of discrimination, is to focus on the competencies for the job—to focus on the specific competencies. If a job requires strategic planning, at what level does this person need to implement the strategic plan in his or her own unit? Does this person need to develop this strategy for his or her unit? Does this person need to contribute to developing the strategy for the whole corporation? And then you check that the person has done things that demonstrate that competence in the past. Same thing with leadership. What type of leadership? Same thing with influencing. Does this person need to influence without formal authority over others, and in what context? In what situation? What does he or she need to do, and in which way can you verify they can do that in an interview and in a reference check? That is the way to eliminate this bias. That’s from the individual point of view.

Now, I mentioned before that in addition to having us educated in making great people decisions—which can be learned, because it is a craft and a discipline—organizations should provide some incentives for making great people decisions happen. You know, making great people decisions is not rocket science. As I said, there is a proven process, but it requires discipline. You need to make sure that people spend enough time making these decisions. One of the ways to do it is to check people decisions. One recommendation that Jack Welch would have, for example—he would say you should calculate the HBA of individuals, by which he means the Hiring Batting Average. So whenever someone is participating in people decisions, he would write down are you for or against this promotion or this hire? One year down the road you go back and check the result of that decision. First, you’ll start separating your great people tellers from your lousy people tellers. You will start finding those individuals who are literally worse than flipping a coin from those individuals who are outstanding at making people judgments.

Second, if people know that they are going to be judged on the quality of their people decisions, they would invest enough time and effort. I think it was the CEO of Bank One who once said we only spend three percent of our time recruiting and then we need to waste seventy percent of our time managing recruiting mistakes. You need to indicate that this is a key priority for individuals. And the third thing: If you check down the road what happened, then it will force you to avoid procrastination and to undo the wrong people decisions, which are inevitable because it’s impossible to predict human behavior.

Goleman: Well, Claudio, it seems to me given everything you’ve said about making smart people decisions, you also have to make smart decisions about the people who select the people. That is, who is going to make the decisions? How do you pick that group?

Fernández-Aráoz: It’s an essential question; so let me give a political analogy. You cannot make great people decisions in a monarchy, but you also can’t make great people decisions in an extreme democracy. It needs to be a selective aristocracy. Why can’t it be a monarchy? Because four eyes see better than two. Someone has got to tell the king that he is naked. Otherwise it’s very easy to fall into a temptation of surrounding ourselves with people we feel comfortable with: people who seem near to us, people who would be obedient to us, who would not challenge us enough. So you need to involve more than one person.

Now, what is the problem of involving too many people, some of whom can be worse than flipping a coin, as I said, in their judgments? The problem was that in the past, when talent was superabundant, your only concern was about not appointing the wrong person. Today, when talent is scarce, particularly for senior level positions—particularly in the most emerging companies, in the BRICs, in the largest markets with the highest growth—the opportunity cost of killing the right candidate for the wrong reason is very large. And if you involve too many people in the process, some of whom either don’t have the competence or don’t have the right motivation, you can kill a right candidate for the wrong reason. You can reject an exceptional star, who is in short supply, and as a result of that, lose that opportunity which would be very hard to replicate.

I remember that I once shared the research on the accuracy of different professional interviewers with the dean of one of the finest business schools on earth. When he saw the research, he said to me, “Now I understand what has been happening in this venerable institution I am a part of. For 20 years here, I’ve been seeing how we make these decisions, and because we are so democratic and we give everyone the same voice, and the same vote, we’ve rejected exceptional professors who went on to have brilliant careers elsewhere.” So it should be a small group of people. Who should those be? Ideally, it should be the boss of the position, the boss of the boss, and a very senior human resources leader who really understands that position. If those three individuals are properly trained on the best assessment tools and techniques and have the right motivation, then you reach a nice balance between a very low probability of making the wrong appointment and a limited probability of rejecting the right candidate for the wrong reason.

EMOTIONAL INTELLIGENCE AND PEOPLE DECISIONS

Goleman: Claudio, there’s a question I’m often asked about selection. As you point out, the cognitive abilities, the intelligence, of a perspective leader and the expertise are very important, but in a sense they are a threshold criterion. Everybody who’s considered has to have those. But the distinguishing abilities, as you point out, and as your research has suggested, are in the soft-skill domain: self-awareness, mastery, empathy, social skill—the emotional intelligence abilities and the competencies that flow from those. The question I’m always asked is: When you’re interviewing someone, how can you tell if they have those abilities or not? What are the best practices for zeroing in on that?

Fernández-Aráoz: You need two things. First you need to use the right behavior-based interviews—and in a minute I’ll explain that to you—but you also need to do reference check. So I’ll come to both points. The second recommendation is essential. Crucial. But first, on the interview.

Once we were doing the search for a CEO of a major company that was basically a very special case. It was a dairy business, and it was a dairy business with more then 10,000 owners that were basically the big farmers that were associated in this huge corporation—a foreign corporation. The candidate actually came from Canada, and the organization was elsewhere, in Australasia. Now, one of the key competencies for success was the ability to influence others without formal power. So, what you would do is you would meet with the candidates and you would say, “Have you ever been in a situation where you had to influence people who were not under your direct line of command? What was this situation? What was your role? What did you do? How did you do it?” And you keep on probing and probing and probing and probing. I can tell you: You can certainly eliminate already many candidates who have no relevant experience for that type of position—for the CEO of a major company. You really don’t want someone who just would say, “Well, what I would do is this,” because some people think that they would do something, but they would not be able to. You want to check that people have planning.

Now, once you have found individuals who have demonstrated that competence and whatever other competencies are relevant for that job, you really need to check references. You need to check references for three reasons: First, in many cases, people just don’t tell the truth. There was a very famous case in the UK about a CPA who was on the board of a Footsie 300 company, and who had worked for the BBC and IBM. They eventually discovered that this woman had changed her name twice. She was not a CPA. She had not worked for IBM. She had been in jail two separate times for stealing money. So these things happen—you really need to check references.

The second reason why you need to check references is because you’re probably familiar with the research that shows that depressive people are pretty accurate on their self-assessments. Non-depressive people are quite optimistic. There was, some years ago, a wonderful 16-page special report in Business Week about the future of work. With a pool of 2,000 senior executives and middle managers in the US, one of the questions was, “Within your own organizational level, are you in the top 10 percent? Yes or no?” Out of 2,000 people you would expect 10 percent to respond yes. Ninety percent of Americans believed that they are in the top 10 percent! If you believe this—it’s a mathematical impossibility. So the second reason why you should check references is because we think that we are much better than what we are, so you need to speak with people who have worked close to that individual so as to provide you with a more objective assessment. The final reason why you need to check references is because when you start building a specification for a job, the temptation is to look for the combination of Superman, Batman, and Spiderman for the salary of SuperDog. Now, I am not going to be able to find that person, so you really need to determine the most important traits of the best potential candidate—who will never be perfect, needs to be complemented with a team, needs to be supported, and needs to be developed. So the feedback and input from the reference checking is essential for that reason as well.

Goleman: I’m really amused at the statistic that you cite of a survey of top American executives asking where they stand in their sector—and apparently 90 percent of executives think they’re in the top ten percent, which of course is impossible; but this raises a more general question, which is: What is the role of self-awareness in being an effective leader?

Fernández-Aráoz: I think it’s really the key, for two reasons. First for job allocation reasons, and second for self-development. So, you think about self-awareness usually in the context of development because if you don’t know where you stand, and you don’t want to be somewhere else, there is no reason for development. That is the key, and it’s the basis for developing your self- control, your self-regulation, your social awareness—and then for your relationship management based on those three clusters. But there is a second reason why self-awareness is key, which is that some people are outstanding for some jobs, and they are lousy for others. One of the most dramatic examples I’ve seen was in wonderful research done by Boris Groysberg and Nitin Nohria from Harvard on GE alumni. You know that General Electric has not only a reputation of being an outstanding company, but it’s a factory of talent. If you look at the profile of the Fortune 500 CEOs, the largest individual group are Harvard MBAs, and the second largest individual group are GE alumni—people who worked for General Electric—and because it’s such a factory for developing talent, they were hired from General Electric into CEO positions of other companies very successfully. They are so successful that each time that a senior executive leaves GE to become the CEO of another company, instantly the market value of this new company spikes at least by one billion dollars, and in some cases by up to 10 billion dollars.

Now, the point of self-awareness: These two professors analyzed a group of 20 GE graduates and they found that this market phenomenon always happened—the market value of a company spiked once they hired this great executive from General Electric. But then they watched what happened over the next three years, and they calculated the net person value of the value created, industry-adjusted, so that they could compensate for any factors in the sector, and they found that about half of these great executives from General Electric created great value and the other half actually destroyed value. On average, less value destruction than value creation but still very significant.

And what was the reason for that? The reason for that was fit. First, strategic fit: some people are good for start-ups, some people are good for turnarounds, some people are good for managing a cyclical business. Second, cultural fit or organizational fit. There are some organizations that focus on the long term, while others are focused on the short term. There are some organizations that are hunters; others are farmers. There are some organizations that work as a team; there are some organizations that work individually. There are some organizations that develop people from within. There are some organizations that grow through mergers and acquisitions, while others grow organically. You need to be a good fit, and there was also the human capital fit, so the second reason why self-awareness is key is because I’ve seen extremely successful executives make dramatic career shifts for bad where they completely screw up the next job because they were not fit for it, and they were clueless. They were just looking at their past track record, being unaware about their circumstances and the competencies under which they really would excel. So that’s why I’m convinced it’s absolutely a key for success.

Goleman: Claudio, you’ve had many years yourself of making people decisions, and also exploring and seeing what makes someone a truly great leader and does not. So, two things: One is, what have been your best and worst people decisions? And what’s your final word of advice for leaders or those picking leaders?

Fernández-Aráoz: First question—worst and best people decisions—that will be short. On the worst, Dan, there are many. You know, I’ve screwed up many times. I did the analysis of my first 250 searches when your book on emotional intelligence came out. At that time, my failure rate was about 10 percent, and I don’t think I got much better than 90 percent right because it’s brutally hard. So there are many cases. Now, what I can tell as a generalization about those many cases where I failed, I failed because I didn’t follow the process, and particularly because I didn’t check references. One of my—perhaps my worst—cases is the case of someone who was an MBA from an Ivy League business school, outstanding on paper, recommended to me by two colleagues of mine, and I didn’t check the references. The client was in a rush, and that person was not only significantly incompetent but had also some very serious ethical problems with the employees. So I screwed up many times, and I screwed up because of not following a disciplined process, particularly checking references.

Goleman: What would you have found if you had checked references in that case?

Fernández-Aráoz: Despite what the former employer was saying, that person had exactly the same type of problems with that employer. The former letter of reference was fine, but it was written to avoid any legal problems. Now my best people decisions, Dan, that’s very easy. My best people decision has been my marriage. I was totally unaware about the process—and I think it’s a gift of God—and marrying my wife, Maria, 31 years ago was the best people decision I ever made, and I think that the closest greatest people decisions were made by God with our three children, Inajio, Innis, and Lucia.

Now—final recommendations to those reading this conversation, at the high level. I won’t get into the nitty-gritty. First, change the mindset. I think that the practice of people decisions today is not at the level of other organizational issues. If you look at the financial decisions—how much science, how much discipline—nobody who has not studied finance for years and practiced finance would participate in a major finance decision. When it comes to people decisions we are all experts. Many board members who have never studied how to make people decisions or participated in a CEO selection would still participate. So, changing the mindset means taking this as seriously as you take other issues, and I think that a new generation of best practices is going to come, and I think it’s going to come from Asia. Because necessity is the mother of all inventions, and in the same way in which at the end of the World War II Japan had to reconstruct its industrial base—because they didn’t have raw materials, they couldn’t afford waste—and they developed the best practices for the world. As a matter of fact, they conquered the value in many industries, including the car industry. I see the same thing happening. And I see in India, even in China, some emerging outstanding practices for making people decisions—it’s changing the mindset.

Second recommendation: Of course, someone like Jack Welch, for example, would say the second most important person in the organization after the CEO should be the HR leader. Of course, you should have outstanding HR leaders and empower them, but at the same time at which you empower the knowledge level, you should educate the power, you should educate the line managers on making people decisions, because line managers will never and should never delegate their people choices—in the same way in which we don’t delegate our marriage choices.

The third recommendation: to have discipline. This, as I said, this is not rocket science, but it requires discipline to close the door when you’re having an interview. To switch off your mobile phone, to take notes while you are interviewing a candidate, to go over the whole list of questions, to make sure that you do the last reference check even if the person you are calling does not respond to the phone. But it’s disciplined people with disciplined thought and disciplined action who build lasting greatness through great people decisions.